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Measurement of Utility : Cardinal and Ordinal Approach

Measurement of Utility

Utility is a Psychological and Personal Concept. There is a deference of opinion, whether measurement of utility can be done or not. Followings are the two approaches are prevalent in this regard.

DIFFERENCE BETWEEN CARDINAL APPROACH AND ORDINAL APPROACH

CARDINAL APPROACH

The economist Marshal and Pigou etc. have their view that utility can measured in the form of moneys According to them, a person will agree to pay for a commodity; just equal to the utility, which he derives from that commodity. If a person is willing to spend more for a commodity, it means that he gaining more (excessive or surplus) utility from that commodity. In this way, it can be said that price to be given for a commodity is a measurement of that commodity. For example, if a person is ready to pay 10 rupees for a coffee, the utility of that coffee for that person Will be equal to 10 rupees. Hence, it is clear from the above example that according to Prof. Marshall, the utility of a commodity can be expressed through Cardinal Numbers like 1,2,3,4 etc. When we express the utility of a commodity in this manner, it is called Ordinal Utility and this approach is Called Cardinal Approach. In other words, according to this approach, utility can be measured.

ORDINAL APPROACH

Contrary to above approach, some economists such as Perito, Ellen, Hicks etc. do not agree with approach of Prof. Marshall and Prof. Pigou. According to these economists, utility cannot be measured. These economists criticized cardinal approach of Marshall, on the basis of following points

Utility is a psychological concept, which cannot be measured in the form of money.

Utility remains unstable.

Money is not the correct measurement of utility because the -value of money keeps changing itself.

The amount of money, which we are ready to pay to purchase a commodity, it shows only the estimated utility of the commodity, not the actual utility.

Money is not correct measurement of utility on the following ground also that if a poor man is unable to purchase a cycle, how we can say that there is no utility in cycle for him.

Prof. Pigou, who was supporter of Marshall’s approach earlier; accepted later that only intensity of desire can be measured by money, utility cannot be measured. Due to these difficulties’ Prof. Hicks and other economist have finally accepted that utility cannot be measured and they developed a new method of analysis, Indifference curve analysis at the place of Utility analysis, in which there is no need to measure utility. In this method, only Ordinal Numbers 1st, 2nd, 3rd, 4th (serial order) are given for utility. In this way, the utility of shirt is more or less than that of bread is expressed by these serial numbers. Unit of utility has no meaning in Ordinal Approach. When measurement of utility of commodity is made, numbers are arranged in a serial order of their importance, such as, ‘First’, *Seconds and Third’ etc.. For Example – three students getting highest numbers in a class are shown in an Ordinal Serial order of ‘First’, ‘Second’, and ‘Third’. When utility is given ordinal numbers, it is called Ordinal Utility and this approach is called Ordinal Approach.